Resource War, Investing in Demographics, Bottom for Stocks and Gasoline, Fund Managers and More!

by Addison Wiggin & Ian Mathias

  • Russian dispute turns into European crisis… the first days of a coming resource war?
  • Not Russia’s only problem… Chris Mayer on a global demographic shift
  • Enjoy $1.60 gas — it might soon be gone… the beginning of the end of the gas price crash
  • Survey says: Fund managers name their favorite asset class for 2009… but can you trust them with your money?
  • J.W. Burritt on the technical bottom for stocks… how to trade the market’s wide new range

  Just days after Russia promised the world that its gas dispute with Ukraine wouldn’t affect European energy supplies … spigots are running dry. From Reuters:

  • Gas shipments from Russia to Germany have been “massively reduced”
  • Italy can access only 20% of Gazprom’s typical supply
  • Slovenia claims Russian gas supply was cut by 90%
  • Czech supplies down 75%; Hungary… down 20%

Croatia, Austria, Turkey… the list goes on and on. The EU says supply to member nations has changed “dramatically” overnight and they’re getting worse. Who knows how this will end. But we are faced with a question: How long will Russia hold energy over European heads before someone takes a shot?

The Labrynth: Russia’s Pipelines Strangle Europe

As we forecast on Friday , we expect Russian-agitated “resource wars” to be a reoccurring theme this year… and beyond.

  On the investment front, energy turmoil in Europe has given oil prices a kick in the pants. The front-month contract is $50 a barrel today, up 40% from its December low of $33.

  Thus, we reiterate our call that the bottom for gasoline prices is likely close. On Dec. 15, retail gasoline ended its 86 straight days of decline, and since then, the price has stayed within a narrow range… about $1.62-1.65. You can see from this chart, if gas hasn’t hit a bottom, it’s at least starting to take a breather:

The national average rings in at $1.68 today for a gallon of the cheap stuff.

  “Russia has a whole other problem most people don’t talk about, too” Chris Mayer commented yesterday. “Russia and Eastern Europe are in the midst of the biggest drops in population since the plagues of the Middle Ages. Putin calls the decline in population in Russia ‘the most acute problem facing our country today.’

“Yet in sub-Sahara Africa, population is blooming. Currently, the sub-Sahara has the highest fertility rates in the world. Several other countries will experience, or are experiencing, population booms — Iraq, Afghanistan and the Palestinian territories.

“Researchers Neil Howe and Richard Jackson recently gave an interesting tidbit on how the world is changing: ‘For the past several years,’ they told The Washington Post, ‘the U.N. has published a table ranking the world’s 12 most populous countries over time. In 1950, six of the top 12 were developed countries. In 2000, only three were. By 2050, only one developed country will remain — the United States.’

“What will the effect of these shifts be? What will it mean as an investor? Hard to say, though there are lots of theories. Booms tend to happen with growing and youthful populations. If so, you’ll want to short Europe, both its Western and Eastern halves. And go long Africa and the Middle East. Asia is a mixed bag. China is aging. But India is young.”

In 2002, we published a book analyzing, among other things, the impact of shifting demography on the economies of the world. Sitting on the desk in front of me is a contract with the publisher for an anniversary update of the book. As the more pragmatic I.O.U.S.A. also illustrates, we suspect demography will play a much bigger role in the future of the economy and markets than anyone reading or writing The 5 today is prepared to accept.

  The Federal Reserve officially kicked off its mortgage-manipulation campaign yesterday. For the first time, the creature from Jekyll Island purchased Fannie Mae- and Freddie Mac-issued mortgage-backed securities. In other words, the very same toxic assets that cut the market in half and brought the U.S. economy to its knees… are now being amassed by the central bank.

No word yet how much the Fed purchased yesterday, but we know they’ve allocated $500 billion for the cause. Should they spend it all, the Fed would have piled 11% of the $4.5 trillion MBS market onto their bloated balance sheet .

  Not to be outdone, the U.S. Treasury bought another $15 billion in banking stocks yesterday. Uncle Sam picked up shares of PNC, Fifth Third and SunTrust, among others. The U.S. government has now purchased over $187 billion worth of financial stocks through the TARP program.

  Nor could the FDIC sit by and let the Fed and Treasury have all the fun … they helped GE Capital unload $10 billion worth of corporate debt yesterday. The government arm backed every penny of the GE debt sale, the biggest guarantee through its “Temporary Liquidity Guarantee Program” since inception in November.

In a plot that’s beginning to inspire ennui, market traders were demanding high yields for GE bonds… government bureaucrats, brimming with wisdom, stepped in to set those rogues straight.

  Stocks in the U.S. suffered a choppy session yesterday and ended with a loss. The Dow fell the furthest, down almost 1%. The S&P 500 and Nasdaq weren’t far behind. Aside from more promises from incoming president, the “best” market-moving news came from Apple, whose CEO Steve Jobs promised Mac-aholics everywhere that he wasn’t dying.

Bad news abounded… a recap below.

  High-grade corporate bonds will likely outperform other asset classes in 2009 , says a survey of fund managers published in the Financial Times today. More than half of the money runners polled said corporate bonds were the “most likely rally in 2009.”

Their least favorite class? Treasury bonds.

  But we pause for a moment to ponder the herd: Of the 4,934 U.S. mutual funds with more than $100 million under management, according to MorningStar, not one made investors money in 2008.

The average fund returned a 39% loss in 2008… curiously, the exact same decline as the S&P 500. Had you simply stashed your money in the Dow index fund, you’d have done 6% better, not including fees.

Even golden boy Ken Heebner didn’t make his clients money. After beating all his mutual fund peers the year prior with an 80% gain, Heebner’s CGM Focus Fund plunged 48% in 2008.

Baltimore’s own Bill Miller takes the cake for worst returns… his Legg Mason Opportunity Trust shed 65%.

  Still, for equities, “a technical near-term bottom could well be in” notes our John Wayne Burritt.

“But before you pop the champagne, notice the two dotted horizontal lines on the chart. These mark the upward and lower bounds of a potential trading range for U.S. stocks. For the S&P, that range is 741-1008. And while that’s certainly better than a grueling bear market, a trading range is not a bull’s best friend.

“While there may be some upside action, it’s not likely to trend upward in any significant way. And without a solid uptrend, bulls don’t have much to celebrate.

“Still, there is a way to play it. Notice that this range is fairly large. In fact, from its bottom to top, the current bound for U.S. stocks creates a massive 36% swing. That means that there are potential put plays at the top before the market turns down and potential call plays once it bounces off the bottom.”

Burritt is the architect of a new program we have called Income on Demand — a precise strategy for earning extra income on the stocks you already have in your portfolio… even if they’ve gotten shellacked in the last few months. To illustrate the strategy we invited Mr. Burritt to our studio here in Baltimore to record a Webinar that outlines the opportunity. You can watch it starting later this week for free. Just sign up here.

  The dollar remains the currency en vogue among traders today. The dollar index continued its nearly month-long rally, inching up another half a point, to 83.5.

  Despite the dollar strength, most commodities are holding their ground, or even rising. Gold sank to $850 yesterday, but has held on to that level today.

And if you own copper or copper stocks, today ought to be satisfying. Copper is up 7% today on news from Dow Jones, of all places. The famous index stewards will be rebalancing the AIG commodity index, and copper is rumored to be receiving a heftier weighting.

  Automakers unveiled another doozy of a monthly sales report yesterday. Sales for the nation’s six most popular manufacturers — GM, Honda, Ford, Chrysler, Toyota and Nissan — all fell at least 30% in December year over year. Chrysler took the biggest hit, down 53% from last year. Nissan and GM fared best, with a 31% decline in sales.
Thus ends the worst quarter for auto sales since 1981, and the worst year since ’92.

  Making matters worse, pending home sales hit their lowest rate on record in November, the National Association of Realtors said today. Their pending home sales index sank to 82 during the month, worse than the Street expected and the lowest score since they started keeping track in 2001.

  The U.S. service sector is still contracting, too. The ISM’s gauge of the American service industry rang in at 40.6 in December, its third consecutive month scoring below 50… the line that divides expansion and contraction.
Good news, though: The service sector is up a bit from November’s record low of 37.3. The Street was expecting a new record low, as were your editors.

  Can’t be surprised to see consumer bankruptcies shot up 32% in 2008. 1.06 million Americans filed for bankruptcy last year, the American Bankruptcy Institute announced yesterday.

  “It is ironic,” writes a reader, “that we live in what we profess to be a global economy but we are deceiving ourselves. America’s balance of payments deficit is the evidence that America purchased more abroad that they produced. Those countries that benefited from the vast American demand for cheaper foreign goods and services should have reciprocated to bring these balances of payments into equilibrium.
“Trade is supposed to be conducted in goods and services. Balance of payments surpluses should not be permitted to fund the purchase of real estate in Manhattan or U.S. Treasury bonds. Under Bretton Woods, the dollar being backed up by gold, the nations were forced to live within their means.
“While America has been negligent in its spending, those surplus nations have been negligent by not reciprocating and buying American goods and services. The stimulation should come from those surplus nations holding large amounts of U.S. dollars, for if America declines, they will not only have lost their best customer, but the U.S. dollars they hold so dear can become worthless paper.

“China ignored its domestic economy and insisted on being an export-driven economy. If it had been vigilant, it would have seen this coming. Stimulating domestic demand may have increased demand for American products and modified the situation somewhat. China even now has the potential to become a vast domestic market, but it seems to me that they are dragging their feet.”

The 5: Hmmmn… seems as though the Chinese have reciprocated precisely by buying U.S. debt. Otherwise, the U.S. government would have gone bankrupt long ago. And… the Chinese economy was, until July 2007, growing at a healthy average of some 10% a year, so we wouldn’t exactly call that dragging their feet.

Still, we agree thinking the credit-binging American consumer could be the “economic engine of the world” indefinitely without producing is and has been a gamble on both sides of the Pacific. Now we’ve got hordes of politicians and bankers — here in the U.S. and around the world — promising to get the economy “back on track.” Unfortunately, it was the track itself that was leading to hell.

   “I was just wondering,” writes another, “as I see central bankers throughout the world stumbling over each other trying to outstimulate their economies over others, isn’t a recession a natural occurrence in the economic cycle best left alone to correct itself? But what the hell do I know? I’m a carpenter. I pound nails for a living.”

The 5: Hey, don’t sell yourself short. Jesus of Nazareth was a carpenter.


Addison Wiggin
The 5 Min. Forecast

P.S. To sign up for Income on Demand, the next installment of the Emergency Retirement Recovery series, click here. It’s free.


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